Turkey politics: Erdogan remains president, but what lies ahead?

Recep Tayyip Erdogan's re-election as president on June 24th will ensure stability under an executive presidential system.

Democratic institutions and governance will be weakened. There will be few checks and balances on Mr Erdogan's decisions, which will lead to a deterioration in Turkey's human rights record.

So far, it remains unclear whether macroeconomic policymaking will prove more orthodox, or whether Mr Erdogan will further tighten his grasp over the Central Bank of Turkey. Much will depend on future appointments to key economic positions.

Turkey's relationship with the US will deteriorate further, owing to numerous bilateral tensions that appear hard to resolve. The possible US imposition of sanctions on Turkish banks for evading US Iran-related sanctions represents a significant macroeconomic risk.

Turkey's relationship with the EU will become increasingly transactional. Turkey will not make progress with accession talks and is unlikely to manage to renegotiate the terms of its customs union with the EU.

Mr. Erdogan's re-election as president on June 24th was met with little enthusiasm in the US and the EU, as Turkey has been at odds with the West since the failed coup of July 2016. In addition, the election process appeared mostly free but largely unfair: opposition candidates received little or no media coverage; the candidate of the pro-Kurdish People's Democratic Party (HDP), Selahattin Demirtas, campaigned from prison; and the state of emergency restrained freedom of speech and freedom of association. However, the outcome of the elections appears clear: Mr Erdogan secured 54% of the votes on a turnout of 88% (final official results will not be announced until July 5th). In addition, results published by opposition observers almost exactly mirror those published by the government.

Right-wing, conservative and nationalist stance ahead

Mr Erdogan's Justice and Development Party (AKP) lost its parliamentary majority on June 24th. As a result, Mr Erdogan will enter into a governing coalition with the right-wing Nationalist Action Party (MHP), led by Devlet Bahceli. The formation of this coalition will have a detrimental impact on attempts to resolve the Kurdish issue, as the MHP is likely to push for hawkish policies aimed at constraining and delegitimising the HDP. In addition, the MHP will advocate repatriation of Syrian refugees and adopt a tough stance on all issues related to national security, in line with Mr Erdogan's ultra-nationalist and conservative views.

Mr Erdogan will continue to clamp down on domestic political dissent and opposition. He will probably not renew the state of emergency when it expires on July 18th. However, he will continue to crack down on the so-called Gulen movement (Mr Erdogan believes that Fethullah Gulen, a Muslim cleric, was behind the July 2016 failed coup). He will also seek to delegitimise and weaken the main opposition Republican People's Party (CHP). The interior minister, Suleyman Soylu, recently declared that CHP officials would be forbidden to attend funerals of Turkish soldiers killed during missions related to fighting the outlawed Kurdistan Workers' Party (PKK) pro-Kurdish separatist movement.

Economic appointments will be key

Macroeconomic policy will prove increasingly unpredictable, as it will be concentrated in the hands of the president. Much will depend on future appointments made by Mr Erdogan (in the absence of a prime minister, the president will appoint all ministers and senior officials). The two ministries involved in economic policy will be that of trade, and that of finance and treasury. A separate directorate will be in charge of budget planning; another office will aim at attracting foreign investment, inflows of which appear to be declining, as investor sentiment regarding Turkey is deteriorating. Against this backdrop, it is difficult to assess whether the Central Bank will have enough room for manoeuvre to raise interest rates to curb persistently high inflation and reverse the recent depreciation of the lira against the US dollar.

Relations with the US will deteriorate

On the international scene, Mr Erdogan will continue to display a conspiracy-minded view of the West, which, in his view, orchestrated the lira's recent depreciation. As a result, Turkey's relationship with the US will continue to deteriorate (Donald Trump, the US president, was noticeably late in calling Mr Erdogan to congratulate him on his re-election). Outstanding issues between the US and Turkey include the detention by Turkey of US citizens (notably a pastor, Andrew Brunson) and the impending purchase by Turkey of the Russian-made S-400 air missile-defence system. This issue led the US Congress to vote against the sale of US-made F-35 jet fighters to Turkey in June; in theory, the jets will be delivered to Turkey as planned, but the US could impose restrictions on the transfer of some technologies, thereby delaying deliveries.

Future irritants between Mr Erdogan and Mr Trump will include Turkey's unwillingness to comply with US sanctions against Iran, which is Turkey's main oil supplier of oil and with which it recently signed a currency swap agreement. Although not our core forecast, the US Treasury could impose fines against Turkish state-owned bank Halkbank for evading US sanctions on Iran. On May 16th a US court sentenced a vice-president of Halkbank, Mehmet Hakan Atilla, to 32 months in prison for bank fraud and facilitating a scheme allowing Turkish and Iranian government officials to circumvent US sanctions against Iran.

Relations with the EU will remain transactional, at best

With the EU, Turkey will maintain a transactional approach. On June 29th the EU agreed on how to finance a €3bn facility to support Syrian refugees in Turkey and prevent their emigration from Turkey to Europe. The EU will continue to criticise Turkey's human rights record, but—unless the death penalty is reimposed—the European Commission will not take steps formally to end Turkey's EU accession talks. However, Turkey's call for less stringent visa restrictions for Turkish nationals wishing to travel to the EU will not be met, and it is unlikely to succeed in its demand to renegotiate its customs union agreement with the bloc. The risks are on the downside, with the relationship between Turkey and the EU likely to become increasingly contentious.